Analyzing decision of the

European Commission
Microsoft | Yahoo! Search Business

Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA

Decision of European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion
 European Commission

Parties
Microsoft Yahoo!
Online Services Business division

Internet search platform, Bing. Online web-wide algorithmic

Online search advertising search
platform, adCenter. Search advertising businesses
including online search
advertising platform Panama.
 European Commission

Subject 10-year exclusive license to

Yahoo's search technologies.
Yahoo internet search and search
advertising staff.
Microsoft as the exclusive internet
search and search advertising
provider used by Yahoo.
12% of the search revenues
generated on Yahoos and its
partners' websites during the first
five years of the agreement will
go to Mirosoft.
Rest 88% will go to Yahoo as a
traffic acquisition cost.
 European Commission

Decision

Horizontal Merger approved

 European Commission

Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion
 Market overview

Organic Search-based Non-search-based

web search advertising advertising
Contextual Contextual Non-context

Text Text Display Display

Adapted from European Commission (2008)

 Market overview

60

50

40

30

20

10

0
2010 2011 2012 2013 2014
Paid search Display Classified

Source: ZenithOpen
 Market overview

Advertisers

Users
 Market overview

A u ct io n bid d in g:
A e
S e co n d - P r ic
Generalized

o - p r ice co n s raint
Zer
U
 Market overview

A M u lt i- h o min g
~

in g le- h o min g
~ S
U
 Market overview

Production costs Switching costs

 Market overview

Production costs Switching costs

Highly specific fixed costs
Negligible variable costs
Sunk
 Market overview

Production costs Switching costs

Highly specific fixed costs
Negligible variable costs
Sunk

Hardware (USD 1 000 mln)

Human capital (USD 1 000 mln)
Server infrastructure
IP patents
Algorithm development
Algorithm update
R&D
 Market overview

Production costs Switching costs

Highly specific fixed costs High Low
Negligible variable costs
Sunk
 Market overview

Production costs Switching costs

Highly specific fixed costs High Low
Negligible variable costs Credence One click
Sunk good away
 Market overview

Production costs Switching costs

Highly specific fixed costs High Low
Negligible variable costs Credence One click
Sunk good away

Network externalities
 Market overview

Production costs Switching costs

Highly specific fixed costs High Low
Negligible variable costs Credence One click
Sunk good away

Network externalities

High entry barriers

 Market overview

Production costs Switching costs

Highly specific fixed costs High Low
Negligible variable costs Credence One click
Sunk good away

Network externalities

High entry barriers

High market concentration

 Market overview

UK France Germany
Google
Yahoo! Bing
92% 94,76% 95,69% Other

Ireland Italy Spain

Digital Clarity. (2011).
Yahoo & Bing Search
Engine Merger. Available
at http://www.digital-
clarity.com/blog/search-
94,67% 97,54% 96,96% engines/yahoo-bing-
search-engine-merger/
 European Commission
Market Overview

Positive effects
Negative effects
Post-transaction analysis
Conclusion
 Positive effects

Microsoft Yahoo!
Economies of scale Reduction of costs
 Positive effects

Microsoft Yahoo!
Economies of scale Reduction of costs

Rationalisation of operational costs

Stronger competitor to Google
Greater value to advertisors
 European Commission
Market overview
Positive effects

Negative effects
Post-transaction analysis
Conclusion
Users
Advertisers Publishers

Distributors
Merger
Advertisers

Merger
Advertisers

Merger
Increased cost per click (CPC)
increased bidder density for
particular keywords
Users

Merger
Users

Merger
reduction of variety of choice
degradation of organic search
unilateral effect
 Publishers

Merger
 Publishers

Merger
increased competition among publishers
reduced competition between the remaining
advertising platforms
lower prices paid for publishers web space
 Distributors
Merger
 Distributors
Merger
reduced competition between search platforms
for distribution agreements
increased Microsofts ability to leverage its market
power in areas other than online advertising
 European Commission
Market overview
Positive effects
Negative effects

Post-transaction analysis
Conclusion
 Post-transaction analysis

100,00% AOL, Inc.

90,00% 8,9% 18,7% Ask Network
80,00%
19,3% Microsoft sites
70,00% 10%
Yahoo! sites
60,00%
50,00% 64,7% 67,6% Google sites
40,00%
30,00%
20,00% Total U.S. search market
share Home & Work
10,00% Locations (2009, 2014).
0,00% ComScore Explicit Core
Search Share Report.
July 2009 April 2014 comScore qSearch
 Post-transaction analysis

40% 37% U.S. Percentage

change of the main
30% search market
22% indicators of Yahoo!
20% Bing Network and
13% 14%
10% Google on a year-
10% over-year basis (Q4
0%
2011 Q4 2012)
Impressions Clickthrough Cost-Per-Click
-10%
Rate
-10%
Marin Software. (2012).
-20% Online Advertising
Report, October-
Yahoo! Bing Network Google December 2012
Post-transaction analysis

Consumer
surplus under
normalized
network benefit
parameters

Iurkov, V. (2013).
Competition, mergers
and exclusive dealing in
two-sided markets with
zero-price constraints:
The case of search
engines. Universita
CaFoscari Venezia.
Post-transaction analysis

Total welfare
under
normalized
network benefit
parameters

Iurkov, V. (2013).
Competition, mergers
and exclusive dealing in
two-sided markets with
zero-price constraints:
The case of search
engines. Universita
CaFoscari Venezia.
 Post-transaction analysis

A merger between two platforms leads to a slight

decrease in consumer surplus and total welfare, but
to an increase in total platform profits.
However, as t , consumer surplus and total
welfare tend to be equal under no merger and merger
configurations.

Iurkov, V. (2013). Competition, mergers and

exclusive dealing in two-sided markets with
zero-price constraints: The case of search
engines. Universita CaFoscari Venezia.
 European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis

Conclusion
Discussion
References
Photography of Microsoft Office by Jeff Wong, www.jeffwongdesign.com/2013/10/microsoft-office-interior